The Impact Of Investor Sentiment On Stock Price

Robert J.Shiller(2003),the founder of behavioral finance,defined behavioral finance as the following levels:(1)Behavioral finance is the product of multiple disciplines,including psychology and decision theory,(2)The theory of behavioral finance explains many market visions that cannot be explained by traditional finance.Some of these visions are actually observed in financial markets,and some are in financial related literature.As discussed in the above,and on the basis of behavioral finance theory,these phenomena that are contrary to traditional theory seem to have reasonable explanations;(3)Behavioral finance is to study how investors are affected by making investment decisions and how it leads to systematic deviations in the outcome of decisions.Investor sentiment is a bridge between psychology and behavioral finance.It can not only measure the investor investment mentality in the market,but also can be combined with modern financial theory to explain various differences in financial markets.As the income of market stocks can reasonably replace the market situation,therefore,we can construct a comprehensive index of the mood that reflects the market situation.We use such a comprehensive index to replace the research of investor sentiment and explore the investor sentiment and the return of China stock market.The relationship between the two is very economical.Investor sentiment is a relatively abstract concept.Firstly,we must use appropriate methods to measure specific data so that we can do further specific research.So far,the academic community has not reached a consensus on the way to measure investor sentiment.This paper will summarize the three methods of measuring investor sentiment,namely using direct indicators or indirect indicators to replace investor sentiment indexes.There is a more objective approach which uses the method of extracting the principal components to construct the emotional comprehensive index.This paper uses the third method—principal component analysis method,which extracts seven source indicators from the number of IPOs,consumer confidence index,price-to-earnings ratio,turnover rate,trading volume,number of shares to be issued,and number of new accounts opened by investors.The main component determines the four principal components based on the processing results of the indicator data,and finally calculates the weight of each source indicator in the composite index,and finally synthesizes the investor sentiment index.The focus of this study is to replace the investor sentiment in the market by the composite sentiment index constructed by the principal component analysis method,and touse the stock index of the Shanghai stock market as the background of research.In order to study the relationship between the two,this paper has created a VAR model based on the investor sentiment index and the Shanghai Composite Index.In order to make the established model availably,the ADF test is performed on the data firstly,and then Granger causality analysis,impulse response function and variance decomposition were used to empirically study the relationship between the two.The research results show that investor sentiment and stock returns have the mutual influence and Granger causality.Investor sentiment will have more obvious impact on stock market returns.